Institutional Ownership in the UK

Over the past five years, the UK stock market has seen some remarkable and historic events. We’ve seen trade wars, anti-globalization, tech-stock dominance, Brexit, and now a pandemic. The question is, how much impact have these events had on institutional ownership in the UK? In this article we analyze the trends in institutional ownership in the UK.

Foreign vs. Domestic?

Institutional ownership in the FTSE 100 currently accounts for 62% of total ownership with a significant portion being owned by large foreign owners. The five largest institutional owners in the FTSE 100 account for over 10% of the entire index with three of these being international. All of these owners have a clear focus on large caps, as indicated by the larger percentage that they own in the FTSE 100 compared to FTSE 250 and FTSE Small Cap.

Foreign ownership has superseded domestic owners in the FTSE 100 index over the past five years. Interestingly, we’re not seeing Brexit leading to foreign institutional owners decreasing their exposure to the British economy. In fact, foreign ownership has increased from 51% in 2015 to just over 53% at the end of June 2020 as shown in the graph below.

For international holders, the performance of the FTSE 100 is significantly affected by movements in the British pound. In 2016, the total return in local currency was 19% while in euros it was only 2%. It’s clear that Brexit heavily affected the British pound in comparison to the euro but we don’t see a large outflow of capital from the market as a whole or any difference in behavior between foreign and domestic owners due to Brexit. Rather, we are seeing that foreign ownership has increased over this period, which suggests that international capital has taken the opportunity to increase exposure to the British economy when the British pound has depreciated compared to other large currencies.

Characteristics of UK Shareholders

As we can see below, there is clear evidence that the institutions holding UK stocks generally have low turnover with over 91% of them classified as either low or very low in terms of stock turnover. This buy-and-hold approach suggests that these investment managers are less reactive to trending news articles and short-term volatility from events like Brexit and COVID-19, seeing lower valuations as an opportunity.

The institutions have a large tilt towards Growth rather than Index, which suggests that even though the institutions are being actively managed, they continue to keep a very long-term view and faith in the British economy. 66% of the institutions are growth-focused while only 18% are index-based.

Looking at the table and chart below we can conclude that for the FTSE indices and UK market, the ownership is clearly split between the U.S. and Europe with total institutional ownership for the two regions combined standing at 94% and 95% for the FTSE 100 and UK market, respectively. Even if we look at the UK and U.S. alone, the UK and U.S. make up 78.8% of the total UK institutional share ownership. The lack of European institutions invested in the UK market is highlighted by the fact that Norges Bank (the state-owned Norwegian oil fund) owns 2.2% of the FTSE 100 and represents the biggest European institution on the list. The second largest European institution is Credit Suisse, owning just 0.4% of the FTSE 100. With this in mind, it’s clear that the British stock market depends heavily on U.S.-institutional capital allocation.

We can clearly see that for all indices and the UK market as a whole, apart from the FTSE 250, the majority of UK shares are held by UK and U.S. institutions and therefore any fluctuations in the domestic/foreign ratio will heavily depend on these two countries. Is this due to the longstanding special relationship between the UK and U.S. or rather international investors using U.S. institutions to manage their money? As Vanguard and Blackrock, the two largest U.S. asset managers, have a global reach of international capital, this might be the case. We don’t have a definitive answer to this question; however, we know that there are more UK shares held abroad than domestically by institutions. That being said, despite severe market turmoil, we haven’t seen sudden sharp movements in capital allocation.

With an upcoming U.S. election, a U.S.-UK trade deal to be agreed upon, and the global hunt for a COVID-19 vaccine, will investments remain stable or will capital look to move out of the UK? If we look at the past few years, history seems to imply that international capital isn’t moving anywhere.

Liam Pilbro, Senior Consultant, also contributed to this article.